Monday, September 24, 2007

Stout on Why We Should Stop Teaching Dodge v. Ford (1919)

What is the purpose of a corporation? To many people the answer to this question seems obvious: corporations exist to make money for their shareholders. Maximizing shareholder wealth is the corporation's only true concern, its raison d'etre. Devoted corporate officers and directors should direct all their efforts toward this goal.

Some find this picture of the corporation as an engine for increasing shareholder wealth to be quite attractive. Nobel Prize-winning economist Milton Friedman famously praised this view of corporate purpose in his 1970 essay in the New York Times, The Social Responsibility of Business Is to Increase Its Profits (Friedman 1970). To others, the idea of the corporation as a relentless profit-seeking machine seems less appealing. In 2004, Joel Bakan published The Corporation: The Pathological Pursuit of Profit and Power, a book accompanied by an award-winning film documentaryof the same name. (Bakan 2004). Bakan's thesis is that corporations are indeed dedicated to maximizing shareholder wealth, without regard to law, ethics, or the interests of society. This means, Bakan argues, corporations are dangerously psychopathic entities.

Whether viewed as cause for celebration or for concern, the idea that corporations exist only to make money for shareholders is rarely subject to challenge. (Although there is a tradition of scholarly debate on this point among legal academics, it has attracted little attention outside the pages of specialized journals.) (Stout at 1189-90 (2002).) Much of the credit - or perhaps more accurately, the blame - for this state of affairs can be laid at the door of a single judicial opinion. That opinion is the 1919 Michigan Supreme Court decision in the case of Dodge v. Ford Motor Co.